Every investor should learn as much about altcoin Market Cap, or market capitalization, as possible for a very basic reason: the market capitalization may tell you how much money you might be able to make from a cryptocurrency.
Many investors regard market capitalization as the best means of estimating an altcoin’s return on investment (ROI). The ROI is the amount of money you might make from the cryptocurrency.
Identifying those altcoins that have a higher ROI can help you make more money in the cryptocurrency market. Understanding the Market Cap can also help you avoid those altcoins with less moneymaking potential.
What is the Cryptocurrency Market Cap?
The market capitalization is the value of all the units of a cryptocurrency that are for sale on the market right now. It is a strong indicator of demand because it shows you how much money has been invested in a particular altcoin.
Basically, market cap is the estimated networth of a cryptocurrency, as given by CoinMarketCap.com.
The Market Cap is calculated by multiplying the Circulating Supply of a cryptocurrency by the Coin Price. The Circulating Supply is the number of units of a specific currency for sale in the market at any given time. The Coin Price is the cost of an individual unit of an altcoin.
On November 15, 2017, the Circulating Supply of Ethereum was 95.73 million, and the unit price was $330.98 for an Ether coin. That means the market capitalization for Ethereal was a little over $31.689 billion on that day.
Fortunately, you will not have to calculate Market Cap yourself because there are plenty of websites like CoinMarketCap that will do it for you. Taking a close at them and reading through the results can show you the potential value of a cryptocurrency.
Make Sure to Look at the Total Distributed Supply Too
Now, keep in mind that the marketcap, as given by the main source that the entire crypto world follows (coinmarketcap.com) ONLY calculates circulating supply. This is a bit deceptive because the circulating supply is NOT equal to the total distributed supply, which is almost always higher than the circulating supply, as it includes the company’s share of coins, extra coins from mining, and other coins not released into the supply.
A more accurate look is to estimate ‘how much’ a cryptocurrency is worth is to look at the total distributed supply, which is the value of the market cap of the Total Supply x Coin Price. This will always be MUCH higher.
How Altcoin Market Cap can predict a Cryptocurrency’s ROI
A good rule of thumb is the lower the Market Cap, the higher the potential return on equity of cryptocurrency. In other words, you can make more money by investing in coins with a lower market capitalization because there is more room for a market cap increase (i.e. the coin can gobble up more market share from the crypto market in general).
However, not every investor is comfortable investing in lower market cap coins. ‘Safe’ investors will usually want to look at the high market cap coins like Bitfcoin, Ethereum, Dash, and Ripple as they tend to be ‘safer’ investments, less prone to the volatility present in lower cap coins. The lower the market cap, the more volatile the coin (but also, the more lucrative the ROI opportunities with ICO’s providing by far the biggest ROI for investors with an appetite for risk).
Many people invest in Bitcoin because its market capitalization has historically far higher than its closest rival, Ethereum. For example, on November 15, 2017, Bitcoin’s Market Cap was around $121.362 billion, while Ethereum’s capitalization was around $31.689 billion.
Bitcoin tends to lead to pull the entire market along.
While high cap coins may be more stable, they are still volatile. Bitcoin has had many 30%-50% price swings since June 2017. If you look back even further back, Bitcoin in the early days fell from the 30’s to 2’s, a spectacular rise and fall.
What the Market Cap Does Not Tell You
The Market Cap is simply one metric that you can use to measure a cryptocurrency’s potential value. There is a lot that Market Capitalization will not tell you about an altcoin’s potential.
There are many other factors that can affect a cryptocurrency’s value including press coverage, forks, technology, government regulation, politics, rumours, and the behaviour of individual investors. These factors might have little or nothing to do with an altcoin’s potential or value.
Many people including large corporations and financial experts regard Ethereum as a far better cryptocurrency than Bitcoin. They think this way because the ecosystem and technology behind Ethereum is far more versatile.
It is possible to build solutions like smart contracts and markets in Ethereum, but not in Bitcoin. Many large corporations such as IBM, Microsoft, JPMorgan Chase, and MasterCard are experimenting with Ethereum, but not with Bitcoin.
Yet Bitcoin’s Coin Price and Market Capitalization are far larger right now. A big reason for this is that Bitcoin is that the only altcoin a lot of people are familiar with. Those individuals are investing in Bitcoin, only because are not aware of alternatives like Ripple and Ethereum. This means that there is a strong possibility that Bitcoin’s Coin Price and Market Cap will drop as more people become aware of the alternatives.
How to Avoid Nasty Surprises in the Cryptocurrency Market
Many other factors can distort the cryptocurrency market. Bitcoin’s Coin Price fell after news stories revealed the Chinese government was shutting many cryptocurrency exchanges in that country were published in summer 2017. This happened because China is the world’s largest market for Bitcoin.
A factor that would definitely affect the Market Cap, and Coin Price, of individual altcoins would be a large corporation’s announcement that it was planning to accept Ethereum payments.
Another game changer for Market Cap and Coin Price would be a major government’s announcement of a national cryptocurrency, or plans to start collecting taxes in Bitcoin and Ethereum. Some central banks, the one in China, have been researching the possibility of national cryptocurrencies.
Every investor should research the news about altcoins carefully on a regular basis – to avoid such nasty surprises. Investors should also carefully examine the Market Caps of all cryptocurrencies and estimate what a reasonable growth potential might be for the coin you choice to invest in.
Understanding the Market Cap and its limitations can help you make money in altcoins. Not knowing the Market Cap is a sure way to lose money and miss opportunities in the cryptocurrency markets.